A Turtle Master's Insights on the Art of the Trade

[NOTE: I apologize for being absent the last few weeks during this important time after having been so active posting. I've had some personal family issues that kept me busy.]

I’ve been very metaphorical lately, but in this post I’ll be nuts and bolts.

The insiders have been driving the U.S. equity markets for the last 1 1/2 year rally. They have made a lot of money. They are largely long.

In order to make a profit they need to sell their stock to someone.

In order to do this, they need to find some suckers. They generally find them. They usually end up being green traders and “investors” who know even less about the markets. The public has stayed out of the rally because they were burnt and still remember the 90s tech rally and how that ended as well as the 2008 crash. So what would the insiders do if they wanted to sell en masse? They’d need to get the public to start buying so they could unload their shares on the way up.

The rally of the last few days has been on relatively light volume, less than average for the big up days.

If I were an insider I’d be hoping to get the price high enough to start a buying binge and then dump my stocks.

As a trader, you can’t look at things this way. The price is currently going up so you can’t be short but we are at a market cusp. A few percent higher is bullish over the long-term. One or two percent lower is very bearish, a breakout failure and one of my favorite short trades.

So pay attention if you are a trader. And don’t pay attention to the news.

If you are a trend follower, you might be in for a wild ride. I advised my friends who were trend followers to exit a bit lower a few weeks back. If the markets fail the breakout that advice continues only with more urgency than the last time. If the prices go higher, and they certainly might, then all bets are off. Respond to what the market does. Don’t predict.

You can judge current conditions but you can’t predict the markets reliably except over the very short term. For example, if this breakout fails, one can predict with much better than 50:50 odds that prices will drop at least half way to the lows after the November highs. This applies to gold, cotton, silver, stock indices, essentially everything that has moved with the same basic price structure, rally for the last six months followed by pause in November and recent new breakout.

The trend followers are all having a huge year. This will end spectacularly at some point. My gut says that time is very close. When these things end, markets all tend to correlate in ways that don’t show up in testing so you end up seeing all things reversing at the same time. It’s not pretty and one of the reasons that trend followers needs iron constitutions.

But you don’t want to fight the trend. If you have relatively small positions, I’d get out and and back in over a very tight percentage range surrounding the highs of early November. The alternative strategy is to risk a 20% to 50% drawdown. If you have large positions and can’t get out without moving the markets, well then I’d do this with partial positions.

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